Largest Pension Fund Pulls $1.2B From Putnam

Posted: November 18, 2003

The money exodus continues from embattled Putnam Investments, with the nation’s largest pension fund withdrawing $1.2 billion as part of an investor revolt against the firm’s mutual fund trading practices.

The decision late Monday by the California Public Employees’ Retirement System was a further blow to Putnam, which has seen investors remove about 8 percent of assets under management since market timing allegations surfaced last month.

Last week alone, Putnam lost $7 billion in assets, according to filings with federal regulators. With CalPERS’ announcement Monday, the company’s losses since last month total more than $22 billion.

The closely watched pension fund’s decision also could spell further troubles for Putnam, as analysts said such moves by high-profile institutional investors often prompt smaller investors to follow suit.

Putnam the nation’s fifth-largest mutual fund firm has managed $608 million in U.S. equities for CalPERS since 1998. It added $609 million in an international equity portfolio three years later.

Sean Harrigan, president of the CalPERS board, said the pension fund fired Putnam after a review showed former senior managers of the company failed to act when its compliance office first reported improper trading activities. He also said the decision was based on fears Putnam would be unable to manage Californians’ money effectively because of distractions from federal and state investigations.

CalPERS also said it would begin reviewing 66 other money managers and expected them to adopt an ethics code to continue doing business with the pension fund.

A message left with Putnam late Monday was not immediately returned, and a message left at its parent company, Marsh & McLennan Cos., earlier in the day also was not returned.

In a Monday filing by Marsh & McLennan with the Securities and Exchange Commission, Putnam reported $256 billion in assets under management as of Friday. A week earlier, it had $263 billion under management. At the end of October, the company had $277 billion under management.

Putnam has said it is committed to swiftly and thoroughly addressing issues and rebuilding its reputation for integrity and reliability.

The company has been embroiled in controversy since state and federal regulators announced civil fraud charges against Putnam for failing to crack down on market timing trades by employees.

Dan McNeela, a fund analyst at Morningstar, said the company remains in ”crisis mode in many ways” and the outflows from Putnam funds could continue.

He said the drain could be continuing for several reasons. Among them: investors may be following the lead of big institutional investors that have pulled out; some big institutions themselves may have longer decision-making processes and because Putnam remains in the news.

In a partial settlement reached last week with the Securities and Exchange Commission, Putnam agreed to reforms some of which the company had already begun to implement and a process for investors harmed by excessive market timing to recoup losses. Putnam had already pledged to make restitution.

Market timing is the use of quick, in-and-out trades that skim profits from longer-term shareholders. The practice is not illegal but most funds do not allow it. Regulators have said that allowing selective market timing, despite policies against it, constitutes fraud.

The SEC settlement which was harshly criticized by Massachusetts and New York state regulators as inadequate says Putnam violated federal securities law by tolerating market timing. But Putnam neither admitted nor denied wrongdoing in the deal.

The company has also said it is facing numerous lawsuits over allegations of market timing.

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